Over the past few years, living in Portugal has become increasingly attractive to expats and retirees from across the globe. This Western European gem on the shores of the Atlantic Ocean offers over 300 days of sunshine a year, welcoming locals, a laid-back lifestyle, and an affordable cost of living.Â
Stunning locations like Lisbon, Portugal’s captivating capital, Porto, the country’s historic second-largest city, and the highly sought-after Algarve region have boosted international interest in investing in a dream home in Portugal. However, navigating the property-buying process in a foreign country can be challenging.
In this article, we will delve into the intricacies of the promissory contract. In Portugal, this is a formal agreement of sale and purchase between the seller and buyer referred to as the Contrato Promessa de Compra e Venda (CPCV Portugal). Â
We will provide an overview of the CPCV Portugal, discuss why implementing one is always a good idea, and explore the benefits of a secured promissory note versus an unsecured one.
Understanding the Promissory Contract in Portugal
So, what exactly is a promissory contract in Portugal? In the sections below, we will explore what a promissory note is, what the written promise entails, and the different promissory note terms and uses.
What is a promissory contract in Portugal?
Regarding making a real estate purchase in Portugal, a promissory contract (Contrato de Promessa de Compra e Venda or CPCV Portugal or Preliminary Purchase and Sale Agreement) is a legal agreement between a buyer and seller that confirms their intention to proceed with a property sale. According to the real estate data intelligence unit, Casafari, this written agreement holds both the lender and the borrower responsible for acting according to the terms and pre-defined conditions agreed upon in the original promissory note.
The promissory note is a legal document outlining the terms and conditions of real estate transactions. The CPCV will include details such as the purchase price, the method of payment, the circumstances, timelines, and more.
Another important element of the CPCV Portugal is the deposit, which is referred to as the sinal in Portugal. The deposit amount is usually 10 to 20 percent of the property’s purchase price. The deposit adds another layer of protection for both parties to the agreement. If the buyer withdraws from the purchase after signing the CPCV, they forfeit this deposit as compensation to the seller. If the seller backs out of the agreement, they are legally obligated to return double the amount of the deposit to the buyer.
Even though it is not a mandatory step in the purchase or sale of a property, having one safeguards the rights and responsibilities of both parties involved until the final agreement or final deed is signed.
It is important to note that there is a difference between promissory notes and contracts, which we explain below:
- A contract requires two parties to agree to its terms by exchanging something of value. This exchange binds both parties to the agreement.
- Promissory notes are a unique type of legal document that acts as a promise to pay a fixed amount of money at a set time. The agreement doesn’t entail any mutual exchanges of valuables.
How the promissory contract (CPCV Portugal) is structured
The promissory contract, or CPCV Portugal, is drafted by a lawyer on behalf of the parties involved in the property transaction. The lawyer must ensure that all terms agreed upon by the prospective buyer and seller are clearly specified in the document and reflect the original proposal and mutually accepted conditions concisely to avoid any misunderstandings.
It is possible to draft the CPCV agreement without legal assistance. However, going down this route is not advised as it carries a higher risk of losing the deposit if the deal falls through. The information in the CPCV Portugal is generally structured in this format:
- Identification of the parties
- Identification of the property
- Conditions of the transaction, including:
- Purchase price
- Deadlines for the Deed and method of payment
- Amount to be paid as a deposit
- Deadlines and method of payment of the deposit
- Penalties for failing to meet deadlines
- Additional clauses
- Financing details: What happens if financing is not approved, or the appraisal is lower than expected, and the financed amount is not ideal
- Settlement of any pending issues:
- The requirement to terminate a lease agreement
- Repair of any damaged structures
- Legalization of a part of the property that is not compliant
- Obtaining missing documentation
- Transfer of the contractual position: Permission to substitute the buyer’s role in the deal. This acts as a safeguard in case of lack of liquidity or provides an opportunity to sell the position to a third party for a higher amount
- Any further details pertaining to the agreement if it is legal and both parties agree
To draft the CPCV, the lawyer must receive the following information
From both parties
- Full name
- ID card number and validity
- Tax identification number (NIF)
- Marital status
- Place of birth
- Full address
- Email address
- IBAN
Information about the property can be found in the documents listed below:
- Urban property registry card
- Permanent land registry certificate
- Energy certificate
To complete the business on the property deal, the following information needs to be provided:
- Amount and payment method of the deposit;
- Purchase price
- Deadline for the deed
- Other specific agreed conditions
Key Elements of a Promissory Contract
A well-drafted promissory note or contract is a roadmap for a smooth property transaction in Portugal. This legally binding agreement lays out the key details for both buyer and seller. The CPCV starts with clear identification of all parties involved, including names and contact information for the buyer, seller, and any representatives.
Next, a comprehensive description of the property is crucial, along with its habitation license and registration number. Financials are prominently displayed, specifying the total selling price and the deposit amount. The contract should also clarify the payment method and any additional payments required before the final signing of the deeds (Escritura).
To avoid confusion, any inclusions like furniture or fixtures should be explicitly mentioned in the CPCV. The agreement sets a clear timeline for the sale, with a defined completion date and details regarding the witness for the official signing of the Final Deed (Escritura). Furthermore, the CPCV outlines a course of action for potential delays, addressing issues related to payment schedules, real estate governing laws, or property-related holdups.
Finally, the contract specifies the conditions each party must fulfill before proceeding to the Escritura stage. By incorporating these essential elements, a CPCV ensures a clear understanding between buyer and seller, paving the way for a successful property transaction.
What is a Promissory Note?
Promissory notes can lie between an IOU’s informality and a loan contract’s rigidity. While not mandatory when purchasing property in Portugal, a promissory contract (CPCV Portugal) is a legal document that protects the rights and responsibilities of parties involved in the sale until the definitive agreement or final deed is signed.
The types of promissory contracts and how they work
Besides being a vital part of the process when buying property in Portugal, the promissory note has other functions as well. A promissory note can also be issued by a financial institution for a mortgage loan or other types of loans taken by a lender.
The master promissory note is the legal document in which you promise to repay your loan and any accrued interest and fees. In the sections below, we explore a few more types of promissory notes related to different circumstances and how they work.
Real estate purchases
When buying property in some of the most desirable locations in Portugal, a key element of the real estate purchase process is the promissory note, a legally binding agreement that confirms the buyer’s intention to proceed with the purchase. This contract is essential because it makes it difficult for either party to back out, providing substantial protection to both buyers and sellers.
Unlike an unsecured promissory note, a secure promissory note acts as a binding commitment, ensuring the sale’s completion and offering security to the buyer. Although some sellers might suggest skipping this contract to reduce legal costs and potentially legal claims, doing so diminishes the buyer’s level of protection.
The entire agreement typically includes all relevant terms, such as the principal debt amount, interest rate, maturity date, repayment schedule, the date and place of issuance, and the signature of both parties. The buyer usually pays a down payment, which usually amounts to 10 to 25 percent of the full purchase price. If the buyer fails to complete the purchase within the agreed time, they lose the deposit. On the other hand, if the seller fails to fulfill their end of the contract, they must pay the buyer twice the deposit value according to the legal documents.
After searching for property among the best places to buy real estate in Portugal, a mortgage loan may be needed to finance the purchase. During the mortgage process, a promissory note template is presented at the beginning of the application. The template is based on the principal sum, payment schedule, interest rate, and personal loan amount. Like the CPVC Portugal, which protects buyer and seller, the promissory note protects the lender and financial institutions if the borrower defaults on the loan agreement.
An amortization schedule is a detailed table that lays out the roadmap for repaying a loan over its term. It provides a monthly payment, illustrating the distribution of your monthly installment into two key components: The interest payment and the principal payment. Furthermore, the schedule keeps you informed about the remaining loan balance after each payment.
Personal loans
The role of a promissory note in personal loan instances is an important factor in establishing a legally binding agreement between the borrower and lender. A promissory note is a contract that specifies the loan amount, repayment schedule, loan costs, and the actions the lender can take if the borrower defaults.
When a borrower signs a promissory note, they agree to a borrower’s promise to repay the loan according to the stipulated terms, whether a long or short-term loan. Along with the principal amount, the loan contract often includes monthly payments that the borrower must make. If the borrower fails to make these payments or defaults on the loan, a demand promissory note will be processed, allowing the lender to take necessary actions to recover the amount that is owed. Promissory notes are common in personal loans, student loans, and other forms of credit from banks or lenders.
However, they can also be used in more informal situations, such as lending money to friends or family. Unlike an unofficial or verbal IOU, a promissory note provides a formal structure and legal recourse, ensuring that all details of the loan are clearly outlined and agreed upon by both parties. This helps to protect the lender’s interests and provides clarity for the borrower regarding their repayment obligations.
Business and educational loans
For business loans, a promissory note is a legally binding agreement that details the principal amount, interest rate according to governing law, and repayment obligations.
This note is essential for securing various types of credit, loans, or accounts receivable. It includes a payment schedule with regular monthly payments, specifies loan costs, and outlines actions the lender can take if the borrower defaults. In cases where the borrower fails to repay the loan by the specified date, a demand promissory note is processed.
Additionally, a master promissory note considers whether the borrower has other short-term or multiple loans, affecting their risk profile and potentially classifying them as higher risk due to legal issues. By signing the promissory note, the borrower agrees to the terms and promises to repay the loan, ensuring all parties are clearly listed and informed.
Educational loans can be obtained from both state and private institutions, with promissory notes playing a critical role in these agreements. According to Eurydice, a European Union network detailing the education system in Europe, student loans in Portugal range from €1,000 to €5,000 annually, with a maximum limit of €30,000 over the course of studies.
For loans exceeding €15,000, institutions often require a promissory note, which serves as the student’s formal commitment to repay the amount. This note includes all necessary details and expectations for both lender and borrower, such as regular payment dates and applicable interest rates. In late payments, fees are applied based on the outstanding principal, considering the borrower’s cash flow and interest rate, ensuring structured and fair repayment terms.
The Stamp Duty (Imposto do Selo) on Promissory Notes
Promissory notes are also subject to Stamp Duty. Referred to as Imposto do Selo, this is one of the oldest taxes levied by the state. When buying property in Lisbon, the Algarve region, or anywhere else in Portugal, you will need to pay Stamp Duty to the Portuguese Tax Authority. The Stamp Duty amount you pay depends on the property’s worth, and the rate is 0.8 percent of the value of the business, or the value of the property levied on whichever value is higher.
Although some notaries might agree to collect this amount and remit it to the tax authority on behalf of the buyer, such arrangements are not universally available. According to the Stamp Duty Code, this tax also applies to bank mortgages exceeding €5,000. Smaller loans or single-payment loans are exempt. The rates for Stamp Duty on mortgage loans are as follows:
- Credit with a term of less than one year – for each month or fraction: 0.04 percent
- Credit with a term equal to or greater than one year: 0.5 percent
- Credit with a term equal to or greater than five years: 0.6 percent
The Difference Between a Secured Promissory Note and an Unsecured Promissory Note
Promissory notes, like loans, can be secured or unsecured. An unsecured loan is not backed by collateral by the lender borrowing money, while a secured loan or secured promissory note includes collateral signed to the promissory note, such as an asset or other financial backing valued at the loan’s principal balance in case of late payment or defaulting on payments. The written agreement protects the lender by allowing them to notify the borrower of non-compliance and potentially take legal action to recover the funds.
This concept extends to property sales. Secured promissory notes in property sales offer a level of assurance to the buyer. The collateral serves as a safety net if the seller breaches the agreement, especially after a significant deposit has been paid. To maximize protection, a buyer should consider using a secured promissory note along with professional services from an accountant, lawyer, or agent.
However, even with unsecured promissory notes, there might be recourse in certain situations. Promissory estoppel acts as a safeguard against broken promises. It applies when a written or verbal promise is made. The other party relies on it and suffers losses as a result. In such cases, the promisor (the one making the promise) cannot simply back out without potential consequences.
If the buyer or seller decides to pull out of a deal, promissory estoppel can come in handy. According to The Gazette of Official Public Records in the UK, a promissory estoppel is like a safety net for promises. It prevents either party from backing out of a written promissory agreement or a promise when the other party has relied on it to their detriment.
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Frequently Asked Questions About Promissory Contracts in Portugal
What is a promissory note?
A promissory note is a written agreement in which one party, the borrower, promises to repay the lender a specific amount. It is used for personal or short-term loans, business loans, educational loans, and more. Promissory notes vary from simple agreements, like borrowing from a family member to complex ones in real estate transactions. They may involve collateral, include late fees, and require regular payments. High-risk lenders and commercial paper are other examples with key differences in terms.
Is a promissory note a contract?Â
Yes, a promissory note is a contract. In Portugal, a CPCV (Contrato Promessa de Compra e Venda) is one example of a promissory note being involved, especially in real estate transactions. If signed by a notary, it becomes a legally binding agreement between two parties that establishes the terms and conditions for a real estate transaction or loan.
Promissory notes are written agreements in which one party (the borrower) promises to repay the total amount borrowed. They can be simple agreements or more complicated promissory notes involving collateral, mortgage loans, or commercial paper. Key differences may include terms for regular payments, late fees, or specific conditions set by high-risk lenders or family members.
What is an example of a promissory note?Â
A promissory note is a written agreement that secures the terms of the agreement for personal or short-term loans, business loans, educational loans, mortgage loans, or real estate transactions. Through a quick online search for a “promissory contract template” you will find a number of promissory note examples and structures.
What are the essential elements of a promissory contract?
The essential elements of a promissory contract for real estate transactions include:Â
- Identification of the parties
- Identification of the propertyÂ
- Conditions of the transaction, including:
- Purchase price
- Deadlines for the Deed and method of payment
- Amount to be paid as a depositÂ
- Deadlines and method of payment of the depositÂ
- Penalties for failing to meet deadlinesÂ
- Additional clauses
- Financing details: What happens if financing is not approved, or the appraisal is lower than expected, and the financed amount is not ideal
- Settlement of any pending issues:Â
- The requirement to terminate a lease agreement
- Repair of any damaged structures
- Legalization of a part of the property that is not compliant
- Obtaining missing documentationÂ
- Transfer of the contractual position: Permission to substitute the buyer’s role in the deal. This acts as a safeguard in case of a lack of liquidity or provides an opportunity to sell the position to a third party for a higher amount.
- Any further details pertaining to the agreement if it is legal and both parties agree
Is it necessary to have a Notary public for a promissory contract in Portugal?
Yes, the promissory contract is usually signed in front of a Notary to ensure legal compliance, verify the parties’ identities, and certify the document’s authenticity. In a private transaction between two individuals, drafting the agreement without legal assistance is possible but not advised. The buyer would be at risk of losing the deposit if the deal fails.
